New York Appellate Court Refuses to Enforce Non-Compete Against Terminated Employees

Paula Lopez, March 10, 2017.

In a recent appeals decision, New York’s Appellate Division, First Department (which hears appeals from lower courts in New York County and Bronx County) affirmed a lower court’s denial of an application for a preliminary injunction to enforce non-compete and non-solicitation provisions included in employment agreements entered into between the plaintiff’s predecessor and its employees.  Critical to the court’s holding was its finding that an employer must demonstrate a “continued willingness to employ the employees” if it seeks to enforce such restrictive covenants.

In Buchanan Capital Markets v. DeLucca, 144 A.D.3d 508, the plaintiff, Buchanan Capital Markets (“BCM”), was a successor to Marcum Buchanan Associates, LLC (“MBA”).  In 2015, MBA decided to look for a buyer for the company.  Vincent Buchanan, the sole member of MBA, decided to purchase the company himself and formed Buchanan Capital Markets with a third party for the purpose of acquiring MBA’s rights and interests.  All of the defendants in Buchanan had worked for MBA and as part of their employment had signed employment agreements containing certain non-solicitation and non-compete provisions.

The relevant provision in the employment agreement at issue in Buchanan stated as follows:

During your employment with [MBA], outside the scope of your relationship with the firm, you will not provide professional services on behalf of or for any other organization except with the written permission of a Company Manager or the President.  For a period of two years after leaving [MBA], you will not personally, nor will you support another organization or firm in, (A) the contact of, or performance of any audit or review of, any [MBA] client who you serviced or for whom you performed work during the period of your employment with [MBA], (B) the contact of, including but not limited to, discussing a future engagement with or submitting proposals to, any company or organization to whom the firm is or has been in the proposal process with at any time during the six months prior to employee’s termination, or (C) employ or solicit for employment, any person who is then or was an [MBA] employee at any time during the six months prior to employee’s termination.

The merger of MBA into Buchanan Capital Markets closed on March 31, 2016.  MBA’s employees were in effect terminated from MBA and told that they would have to undergo an “official hiring process” with the successor company. Any employees who chose not to seek employment with BCM or who were not retained by BCM would receive assistance in finding new employment and would have three months of Cobra coverage paid for by BCM. All four Defendants chose not to seek employment with BCM.

In April, after Buchanan learned from some clients that they had received communications from the Defendants soliciting their business, BCM filed an action in Supreme Court, New York County asserting claims for breach of the employment contract, specific performance, conversion, and seeking injunctive relief.  Simultaneously with filing the action, BCM filed a motion for a temporary restraining order and preliminary injunction to enforce the restrictive covenants contained in the employment agreements.

The trial court denied BCM’s request for a temporary restraining order and, after briefing and hearing on its motion for a preliminary injunction, the court refused to grant a preliminary injunction enforcing the non-compete and non-solicitation provisions of the employment agreement.  Under New York law, a party seeking a preliminary injunction is required to demonstrate a likelihood of success on the merits, irreparable injury, and that a balance of equities weighs in its favor. The trial court concluded that BCM had not met these factors.

With regard to BCM’s likelihood of success, the court found that the evidence showed that Defendants had been terminated by MBA without cause, and the mere offer to have BCM consider their application for employment did not evidence a continued willingness to employ the defendants.  The court further stated that enforcement of the non-compete and non-solicitation provisions were “contingent on the employer’s willingness to employ.” The First Department adopted the trial court’s reasoning in affirming the denial of the injunction.

Both the trial court and Appellate Division found that BCM could not demonstrate irreparable injury, the second factor needed for obtaining a preliminary injunction.  Irreparable injury is that which cannot be repaired, restored or replaced through the payment of money, such as an environmental harm.  Both courts disregarded BCM’s argument that absent the preliminary injunction its business would lose the good will of its clients and have its reputation damaged.  Instead, they found that any injury to BCM, such as lost profits from clients that chose to work with the defendants, would be compensable with monetary damages.

With regard to the balancing of the equities, both the lower court and the Appellate Division found that BCM did not make the requisite showing, but for different reasons.  The lower court rejected BCM’s argument that the defendants had agreed to the terms of the employment agreement and were not fired without cause but voluntarily chose to leave their employment.  Instead, the trial court found that even though BCM offered to pay the defendants until the merger was complete, defendants were required to apply for employment with BCM through an official hiring process.  The requirement that Defendants re-apply amounts to a termination without cause.  The Appellate Division’s analysis of the balancing of the equities instead focused on the fact that MBA’s clients had not signed any agreements to use its services for a set period of time, were free to choose between defendants or BCM, and to enjoin defendants from continuing to service the clients that had chosen to work with them would alter the present status quo.

The Appellate Division, First Department is an influential appellate court within the State of New York. The First Department’s decision in Buchanan is a clear warning to employers that enforcement of non-compete and non-solicitation provisions is contingent on whether the employer has demonstrated a “continued willingness to employ the party covenanting not to compete.” Employers who place significant value in employment agreements with restrictive covenants that are meant to safeguard against competition and solicitation of their clients by former employees should be wary when it comes to terminating employees without cause.